How long for China to sort out fabless strategy?

BEIJING – With reportedly 450-plus fabless chip companies in China, it’s fair to ask how many more years can they survive in this business and, more important, what they must do now to grow into a significant force in the global market.

In a series of interviews recently conducted in China by EE Times, Chinese executives estimated another two to 10 years before these fabless upstarts either become irrelevant or go out of business—assuming that they keep doing what they’re doing right now.

In essence, while this window of opportunity differs from guess to guess, everyone seems to agree that China’s current fabless model isn’t sustainable for the long haul. Chinese companies can’t keep growing simply by relying on today’s cost advantage, and working even harder without sleep. However, the hard truth is that the cost advantage in China has been driving many companies to double or the number of triple engineers they hire. In turn, this trend instills fear – warranted or unwarranted – among engineers whose jobs are still in the United States.

As Datong Chen, managing director of Beijing’s WestSummit Capital Management, pointed out, if a company has 100 engineers in China, it can design a product at a sixth or an eighth the cost of the UnitedStates, and in one-third the time.

Wayne Dai, company president and CEO at VeriSilicon, echoes this point.

When asked “why China,” Dai simply said: “The United State is too expensive. Taiwan is good but doesn’t have enough of the engineers [we want], and India isn’t ready.” As far as the cost of doing business is concerned, if the U.S. is one, Taiwan is about one-third, and China comes out to be one-fifth on average, Dai said. Asked about the quality of engineers, Dai said that young Chinese engineers may be green, but given the best design flows and tools, their energy compensates for their inexperience. “We tape out one chip per week at VeriSilicon,” he added. While the company has multiple offices throughout the world, VeriSilicon has a total of 380 people working in China – 250 based in Shanghai.

But it was VeriSilicon’s Dai who sounded the alarm that Chinese fabless companies “will go out of business within the next two years” without a unique business model. VeriSilicon, similar to eSilicon and OpenSilicon, is a fast-growing “IC design foundry” which offers its customers silicon solutions and SoC turnkey services. VeriSilicon, in essence, is not in the business of making their own chips. Rather, it’s in the service business – designing chips for clients, leveraging VeriSilicon’s own IP’s and those from other sources.

How long for China to sort out fabless strategy?

Setting aside the business-model issue, the reality is that the cost of engineers has also been rising in China.

Some report that high-end salaries for Chinese engineering managers – such as a VP of engineering based in Beijing – might have already peaked in 2007 – 2008. But the price of design engineers is still going up. Hence, companies looking to keep their gross margin low are going westward in China in search of cheaper design engineers.

The biggest trap Allen Wu, president of ARM China sees in China’s fabless model today is that there are just too many local companies who compete purely on cost with similar products. That isn’t sustainable. And it’s why Jian-Yue Pan, corporate vice president, Asia Pacific region at Synopysis, is convinced that the survival of fabless China hinges on companies’ power to innovate. “You need to move up the innovation ladder.”

Pan said, “If you want to play in the global market, you need global talents and global supply chain.”

Ok, so how is Taiwan?
Or better yet the US?
I have a target market of 10Million / yr. So this concerns me somewhat. Now that certain consortium's are stabilizing, I can proceed to build stage and drive market for advance sales. But thinking that the production side is frail, then I can't help but feel unconvinced of their assurances.
:-/

Hi Junko, please correct me if my point is wrong. The interpreter did not translate following comment correct.
"if a company has 100 engineers in China, it can design a product at a sixth or an eighth the cost of the United States, and in one-third the time."
As should be
if a company has 100 reverse engineers in China, it can duplicate a product at a sixth or an eighth the cost of the United States, and in one-third the time.
Here is a cultural gap, if you wonder the true thought from said CEOs, you must investigate their background thoroughly, i.e. how did they get the fabless company established in the very early day.

Just to be clear, the quote above is not through an interpreter; we were both speaking in English.
I am sure that there were times when China was focused on reverse engineering (like in early days of the Japanese semiconductor industry). But in this context, we are talking about new products based on China's own designs.
I was mindful of learning about each CEO's own experience, history, how they started their own companies in China. None of the stories was same; each very personal and interesting. Let's not generalize Chinese companies.

Many appreciate your quick response. It is necessary to clarify that,
there is huge cultural difference between Japan and modern China (i.e. since 1977)
Although not an expert, I think China is on a absolutely different way as Japan. For example the 'great wall' figure in your report, which is fortunately built hundreds year ago. Nowday, you won't be able to see any engineering work last for a half century. e.g. http://www.telegraph.co.uk/news/worldnews/asia/china/5685963/Nine-held-over-Shanghai-building-collapse.html
It is a phenomenon of the conventional culture deteriorated in the country.
Amoung of those CEO's own history that you learn, have you ever varify those stories? Did you really get hidden stories underground?
I can fully understand the obstacle confronted as it is difficult to be 'Ai Weiwei' who take the risks of being prison to investigate and tell the truth. http://en.wikipedia.org/wiki/Ai_Weiwei
Agree that we should treat each company individually. Rather than promote those fabless firms, why not do an investigate on the plain fact, such as a chinese foundry engineer's life after Sichuan earthquake, how one-child policy change the way of semiconductor in China, etc, etc.

mmmmh, thanks for your note. I think it's more prudent for a reporter to go after topics and subjects, especially in foreign countries, from the ground level -- one step at a time.
We are all mindful that we don't know everything, and we probably won't know everything.
In my mind, a reporter's responsibility is to talk to as many people as he/she can, verify facts, and approach any topic with an open mind. Don't assume anything.

China has much older fab equipment. They may not be suited for cuttinf-edge applications, but may find much usefulness in the health-care, education, "quality-of-life" fields. Many smaller Chinese fabless can seek growth via these areas. Of coiurse, one cannot preclude the adoption of the "samsung model" by ne of the giant private/state-own companies!
vpjoshua